Archive for the ‘Taiwan’ Category

Here is a rare thing. A dynamic theory from an economist — whereby the solution to today’s problem may not be the solution to tomorrow’s problem. It’s David Dollar, former World Bank country chief for China talking about the role of institutions in development…

What institutions do Asian countries need to keep growing?

31 May 2015

Author: David Dollar, Brookings Institution

The notion of a ‘middle-income trap’ has entered the lexicon of policymakers in emerging markets in Asia and elsewhere. Many leaders of countries that have experienced fast growth — such as Chinese Premier Li Keqiang — worry that economic growth will come off the boil as their countries reach middle-income status.

Growth for virtually all advanced economies was slower in the 2000s than in the 1990s; meanwhile growth rates in poor and middle-income countries accelerated. But there is a lot of variation in these broad trends, especially for the middle-income countries. Some of the latter have seen very impressive growth spurts, while others have stagnated.

What explains why some countries grow fast and others languish? There is a strong empirical relationship between the quality of institutions (as measured by the World Governance Indicators’ Rule of Law index) and economic growth. But institutional quality does not change very much from year to year or sometimes even from decade to decade, which makes it hard to explain why countries have periods of high growth followed by low growth (or vice versa).

Institutions which are well-suited to one phase of economic development may be ill-suited to another. One way to resolve the paradox of persistence of institutions and non-persistence of growth rates is to focus on the quality of institutions relative to the level of development. It turns out this can help explain why China and Vietnam, for instance, have seen such high growth in recent times: they have relatively low institutional quality in an absolute sense, but they have above-average quality institutions given their stage of development, which might, for instance, help to attract foreign investment to China or Vietnam rather than other Asian countries with similarly low wage levels but weaker institutions.

Another question is whether authoritarian institutions are better for economic growth than democratic ones. It may depend on the stage of a country’s development. When we look at the historical experience, in countries that have a per capita income below US$8,000, authoritarian institutions seem more conducive to growth. But at higher levels of income, democratic countries are likely to see higher growth than authoritarian ones. Why might this be so?

One explanation might be that at low levels of income, the economic priority of government should be to establish basic law and order and an environment in which private investment, including foreign investment, can operate. This is a catch-up stage, in which innovation is not yet particularly relevant. But the usual economic strategy for authoritarian governments relies on capital accumulation, which becomes less effective as countries get richer. When an economy reaches the point where acquiring more and more capital is no longer sufficient for rapid growth, the need for political and economic institutions that promote competition, innovation and productivity growth becomes paramount.

Interestingly, it is about at the US$8,000 per capita GDP mark that two of East Asia’s great developmental success stories, Taiwan and South Korea, were also becoming free and open polities. By the early 1980s for Taiwan and the mid-1980s for South Korea, a move had been made away from authoritarian institutions, which continued until both reached fully democratic status as measured by Freedom House’s civil liberties metric.

Of the countries that have witnessed rapid growth in Asia recently, Vietnam has shown some steps towards political liberalisation, with its civil liberties score moving to five, which is slightly better than either South Korea or Taiwan at the same stage of development. But Vietnam is entering the stage of development where the line of thinking presented above implies a need for further political reform. Greater freedom will be necessary to strengthen property rights and the rule of law in order to bring about an environment for innovation and productivity growth.

China, on the other hand, has largely eschewed political reform. Although he has placed a lot of emphasis on the idea of implementing the ‘rule of law’ in China, President Xi Jinping has made it abundantly clear that he wants to pursue economic reform without political liberalisation; some observers even point to backsliding in recent years on the question of freedom of ideas and debate. The historical evidence would suggest that this will weigh on the growth of the Chinese economy in the future. At the stage of development at which China now finds itself, South Korea and Taiwan were on the way to becoming more or less free societies.

Of course, just because no authoritarian country (apart from oil producers and, depending on how you classify it, Singapore) has reached more than 35 per cent of US GDP per capita does not mean that it will be impossible for China to do so. But the historical evidence should caution Chinese policymakers against thinking that the kind of political institutions that have facilitated China’s astonishing growth up to now will be sufficient or optimal for the next stage of its development.

David Dollar is Senior Fellow, John L. Thornton China Center, Brookings Institution. He was the former World Bank Country Director for China and Mongolia in the East Asia and Pacific Region.

It is worth quickly noting what a beating the KMT just got in local elections in Taiwan, winning only six of 22 contested seats for county and city heads. For the most part, people have had enough of president Ma Ying-jiu and his decidedly lacklustre leadership. This is also the first election on the island since the student protests in Taipei in March, which headed off a new services trade agreement with the mainland. The election results reflect general unease that Ma’s only economic policy is to look to Beijing for more integration and more favours. Plus the Taiwanese public has been following events in Hong Kong closely, where Beijing has breached the spirit of the Basic Law agreement on gradual democratisation. If Beijing cannot be trusted over Hong Kong, why should it be trusted over Taiwan? This seems to be an increasingly telling question when Taiwanese voters encounter a ballot box. It is particularly telling because more and more voters identify themselves as Taiwanese rather than Chinese in each successive election:

Breaking news on Sunday night suggested that Ma Ying-jiu will resign as Chairman of the KMT.

Well, HK police attacked demonstrators in Admiralty Monday morning. A wrap here from The Guardian, with video. Meanwhile, a big hoo-ha about Chinese embassy in London telling British MPs they will not be allowed into Hong Kong to investigate what is going on. Hoo-ha because it is probably illegal for Beijing to make such decisions, according to the Basic Law. But since the Hong Kong government will line up behind (or slightly in front) of whatever Beijing decrees, likely not actionable in any court of law.

And no, Ma Ying-jiu over in Taiwan has not said he is stepping down as KMT chairman. Yet. Probably no one quite so fabulous as Brave Number Nine Horse to take over the job.

Like this:

A major intellectual breakthrough I made in the last 10 years (one of very few) is to recognise and begin to incorporate in my thinking the dynamic nature of culture — in other words how culture both changes for reasons internal to societies and can be changed via policy intervention. I started to understand this working on Asian Godfathers, partly by spending time with ethnic Chinese, Arab, Tamil and Indian tycoons in south-east Asia, and partly because I tripped over, and then read, the extraordinary anthropological work of G. William Skinner from the 1950s*. Then I just started reading more anthropology (also known as ‘journalistic reportage for grown-ups’).

Anyhow, if you want to understand what is going on in Hong Kong and Taiwan just now, you need to fit the cultural piece of the jigsaw. As luck would have it, here is a new paper dealing with just this issue, across the three societies of mainland China, Hong Kong and Taiwan. It is free, easy to read and enlightening.

* The core Skinner opus:

G. William Skinner, Chinese Society in Thailand: An Analytical History (Cornell University Press, 1957)

G. William Skinner, Leadership and Power in the Chinese Community of Thailand (Cornell University Press, 1958)

Blogroll

Baseline Scenario
About the US economy, mostly. These boys are not too funny (they are economists) but they put in serious hours on this site and it is worth reading. Johnson is a Brit former IMF economist with perspective. Updated daily.

John Kay
About Britain and micro-economic issues. Research-heavy analysis rather than opinion. One of the few people with really clear ideas on bank regulation, but not yet (for me) fully thought through.

Krugman
Posts multiple times a day cos he’s manic. I was at a boring conference with him where he appeared to take frantic notes. Later transpired all he had written on his pad was ‘I need a beer’, about one hundred times. Still got Nobel.

Martin Wolf (FT sub needed)
Particularly good on Europe. During his life, Wolf has fallen in love with — and then become disillusioned by — the Labour Party, the World Bank, and perhaps now globalisation. The constant is his hunger for answers.

The Big Lychee
About Hong Kong. Affiliated with Hemlock, the exquisitely misanthropic, underemployed, billionaire’s gweilo running dog. Original Hemlock files available. Updated every day, because the author has a huge salary and nothing better to do.